Is Dropshipping Legal? How to Avoid Getting Sued Selling on Shopify

Have you been considering launching your own website and making money in e-commerce? If so, you might have some questions about dropshipping. In particular, many people wonder if dropshipping is legal.

In this post, you’ll find out about the legality of dropshipping. You will also find out how to make sure that your ecommerce website is above board and operating ethically from the very beginning.

Disclaimer: Of course we are not legal professionals nor do we give legal advice. For actual legal advice, you'll want to seek out an attorney. This article is just our personal perspective from operating a multi-million dollar dropshipping business.

Is Dropshipping Legal?

First of all, let’s cut right to the chase: dropshipping is definitely legal.

It makes sense for people to be a little suspicious of it, though. A lot of people are familiar with dropshipping from sites like AliExpress. While technically legal, there are some legal and ethical gray areas with using sites like these to build a dropshipping business.

We’ll discuss those more in a moment.

Defining Dropshipping

To understand the legality of dropshipping, you need to first understand what it really is. It’s a fulfillment method. That’s it. It’s simply a way to connect consumers who want to buy a product with the suppliers who provide that product.

Most of the online shopping sites you’re already familiar with are using a form of dropshipping. This includes big names like Amazon and Wayfair.

They’re not carrying all of the items listed on their site in their own warehouses or directly fulfilling orders to customers. Instead, they’re doing the work of attracting the customers. Once they get an order, they’re basically going to the supplier and saying, “Hey Manufacturer, please ship this directly to the customer.”

We worked with a supplier that’s a big seller on Amazon. On the product pages, it says “shipped and sold by Amazon.” However, we know for a fact that the supplier was doing the shipments directly. Dropshipping is even more prominent on sites that sell more expensive items like Home Depot and Houzz.

Why Dropship?

For a lot of products, it doesn’t make sense for sellers to take on the costs and labor of shipping. This is especially true for big, bulky products that can be expensive to ship and store.

It just isn’t worth it for the companies to bring the products to their own warehouses. They’d have to pay for the shipment and the storage. Then they would have to pay for shipping again when it goes to the customer.

Using dropshipping is actually a win-win-win. The suppliers get the benefit of having an eager and energized flow of customers. The sellers get to make a profit on sales from their website without the overhead costs of shipping and storage. The customers get lower prices because the costs of shipping and storage are streamlined.

In short, while some people think that dropshipping sounds devious, it is perfectly legal. It’s also completely in line with the standard business practices of many top online sellers.

This couch from Home Depot is most likely dropshipped since it would be very costly to ship multiple times.

Now that we’ve answered that question, let’s look at what you need to do to make sure that your dropshipping site is legitimate and operating smoothly.

Do You Need a Business License to Sell on Shopify?

The short answer is no. Technically, you do not need a business license to start selling or dropshipping on Shopify.

Getting started with a selling site like Shopify is easy. You just go in, create an account, upload your bank account information and social security number, and start selling.

However, the real answer is more complicated. Just because you don’t legally need a business license doesn’t mean that it’s a good idea to operate without one. Obtaining a business license is an important step to take for three reasons: Liability, Legitimacy & Simplicity, and Taxes.

Liability

Getting a business license helps to lessen your liability. Registering as an LLC or an S Corp (or the equivalent for your country or state) limits your personal liability for any products sold through your online storefront.

Liability is an important consideration no matter what you are selling. However, it is especially important if you are selling products with a site like AliExpress, which can often seem like an attractive, easy path for new dropshippers.

Selling products from AliExpress is perhaps one of the most familiar forms of dropshipping. If you have been considering starting your own e-commerce site, you have probably run across one of the many blog posts or videos encouraging you to get started through AliExpress.

Really, that’s a terrible business model. We personally don’t know anyone who has built a really big, sellable ecommerce website using products from AliExpress.

While AliExpress offers a lot of exciting potential, there is not a lot of trust in the relationship between you and the manufacturer. If there is a problem with the product, the customer is going to see you as the source of their trouble. If you sell a product that breaks and causes an injury, the customer is going to turn to you, not a supplier in China they’ve never heard of before.

One easy way to manage your liability is to only work with suppliers that have a legitimate product and an established U.S. presence or presence in your home country (European Countries, Canada, Australia, etc). Pick suppliers that customers will be familiar with so that they can contact them directly with issues or concerns.

Think about it. If you want to develop a big, meaningful e-commerce site, you want to develop relationships with suppliers just like big retailers do.

This is how successful online retail giants like Amazon and Wayfair operate. It’s also how huge, established brick and mortar retailers like Home Depot or Lowes do it. They have built trust and familiarity with brands creating high-quality products as they stock their shelves and build their product pages.

Legitimacy & Simplicity

That brings us to the second reason you should get a business license before you move any further with launching your dropshipping site. If your goal is to build meaningful relationships with trusted suppliers, you need to show them you are trustworthy yourself. No reputable brand is going to work with you if you don’t seem like a legitimate business.

Being registered as an LLC or S Corp shows suppliers you are worthwhile and serious about your business.

It makes the process of developing business relationships simple. you fill out a few forms with your business information for the supplier and you're off to the races.

Taxes

Taxes are your biggest expense as a business owner. We won't get too deep into it here, but simply put, you need a real business to maximize your tax write-offs. If you're taking your online business seriously, it's a necessity.

How Do You Start a Shopify Store Legally and Ethically?

Before we talk about what you should do when you’re starting your store, let’s take a moment to discuss what you should not do.

What Not to Do: Turn to Glamorized or Trendy Product Sites like AliExpress

AliExpress often gets attention from new dropshippers because the products they sell seem trendy, new and glamorous.

When you first look at AliExpress’ catalog, you will see hundreds of amazing products that look like they would be easy to sell.

It’s not until you start peeling back the layers that you find out that the Star Wars product you have your eye on is going to run into copyright problems and that the expensive watch you’re excited about is likely defective.

Not to mention your customers are likely to be ticked off waiting 4-6 weeks when they could get the same product on Amazon in 2 days.

There are so many items for sale on AliExpress (even condoms). It's deceptive for want to be dropshippers because it makes them feel like there is unlimited potential. Meanwhile, anyone can just buy these products on Amazon and get them in 2 days.

What to Do: Turn to Trusted Manufacturers and Brands

If you want to get a reputation as a reliable seller of high quality goods, then you need to find high quality suppliers.

It’s really not as difficult as it sounds. After all, these companies want their products to be sold. They’re happy to partner with sites that will better connect them with eager customers.

Step 1: Get your business license. As we discussed above, this helps you seem more legitimate and serious when you reach out to suppliers about potential partnerships. Depending on your state or country, registering your business will only cost a couple hundred dollars.

Step 2: Set up your Shopify store. Really spend some time making it look nice and creating a site where customers are likely to make purchases. There are lots of free tutorials about how to set your site up in the best way. Use them to create a great base for your ecommerce business.

You can also grab our course where we show you exactly how you need to design your website to secure the best suppliers in your industry.

Step 3: Contact the suppliers. Determine who you would like to sell for and contact them to open a wholesale account. You’ll need to fill out their paperwork (which is usually only a few pages), and then you’re ready to go. They’ll give you pricing information, and you can start selling.

Are You Allowed to Dropship on Amazon or Ebay?

Again, there is a simple answer and a more complex one.

The simple answer is yes. You absolutely can dropship directly on Amazon or eBay.

As we said earlier, dropshipping is really just a method of fulfillment. You, as the dropshipper, act as the middle ground between customers and suppliers. You do the work of getting customers to know the product exists and to see why it has value to them. Amazon and eBay are logical places to attract customers.

There are two methods to using dropshipping, and using Amazon and eBay to list dropshipping products opens up doors to the more ethically questionable of the two.

The Wrong Way: Exploiting Other Online Sellers

Some dropshippers go on Amazon or Ebay and set up products from other online websites. For instance, a dropshipper might take a product from Walmart’s website and create a listing for it on Amazon with a markup in price. Next, they’ll make a sale through the Amazon listing.

Then, they’ll simply take the customer’s information and then have the product shipped directly from Walmart to the customer. They keep the profit from the markup for themselves.

Depending on what site you are using, this could be explicitly against the rules. At the very least, sites are going to see you as a questionable or untrustworthy seller when you act in this way.

On top of that, you are likely to run into logistical problems. If a customer wants to return a product and is unable to do so, they are going to give you bad feedback.

If enough of these negative experiences stack up, you are going to lose your ability to make sales. You may even have your account suspended or shut down. You can also end up being in the hole in terms of tax liability.

Yes, this has happened to someone we know who tried to make a living dropshipping on eBay in this way.

Dropshipping through Amazon or eBay using these methods puts you at high risk, professionally. Rather than taking the time to build your own site and customer base, you are just leaching off of established brands to make a little money.

What’s worse, you’ve done all of this, and it’s not even easier than doing it the legitimate way!

The Right Way: Helping Build Online Presence

There is a right way to use Amazon or eBay for dropshipping. If you are working with a reputable brand that currently does not have an Amazon presence, it makes perfect sense for you to expand their presence on the site.

You can make a nice listing for the product that you’re also selling from your own website.

There’s nothing wrong with this method. In fact, we recommend it!

You’ll get the exposure of Amazon and eBay for your sales and the supplier will get a bigger customer base. Doing it ethically allows everyone to win.

You can also make big bucks by having the supplier agree to use you as their exclusive Amazon or eBay seller.

Next Steps

If you're serious about learning how to start your dropshipping business the right way, then check out Instant E-commerce Asset. We show you how to start with nothing and create a full-time income using the most ethical and legitimate strategies. It's the same strategies that allow us to create profitable dropshipping assets in as little as 2-weeks.

You can also grab our free course, The Online Asset Playbookwhere we show you exactly how dropshipping sites fit into building a well-rounded online asset portfolio.